Financial Fortitude Key For Small Farm Success

Financial Fortitude Key For Small Farm Success

Basic tractor on the horizonMany of Florida’s farms are considered small farms. According to the 2012 Census of Agriculture, 69% of Florida’s 47,740 farms are less than 50 acres and 93% of Florida farms have gross farm sales less than $250,000.

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After several years of strong economic performance, the U.S. farm sector has entered a down cycle as agricultural commodity prices have fallen. The USDA forecasts a 29% reduction in net cash income and a 39% reduction in net farm income for 2016 relative to 2014 levels nationwide. In Florida, citrus greening is causing a steep decline in citrus production. Small farms are especially vulnerable during times of financial stress. USDA studies find that smaller farms have weaker financial indicators and higher exit rates compared to larger farms. In other words, small farms are more likely to go out of business than large farms, although small farm exit rates of 9% to 10% each year are similar to exit rates for other (non-farm) small businesses.

University research provides clues about factors that contribute to small farm success or failure. Indicators positively associated with self-defined success among small farms include years of farming experience of the farm operator, access to educational programs, use of financial management tools, and value-added or agritourism activities. Financial management practices also have been found to be positively associated with farm profitability, measured by rate of return on farm assets. In particular, one study found farmers who conduct investment analyses (such as payback period, cashflow analysis, or net present value analysis) to evaluate capital investments are more likely to be profitable.
Several financial management practices can help small farms succeed: (1) market planning, (2) enterprise budgeting, (3) investment analysis, (4) monitoring financial measures, and (5) managing risk. Together, these practices can help inform management decisions and improve the likelihood of long-term profitability.

Market Planning

Production plans should be guided by the farm’s marketing plan. A marketing plan starts by identifying target customers and understanding their preferences. Market planning includes decisions about product mix, quality attributes, where to sell, when to sell, how to promote, and setting or negotiating prices. Although producers of generic agricultural commodities have little, if any, control over price, small farmers often seek higher-value niche markets where they are able to sell at higher prices. Identifying what the buyers’ value, and providing the right products with the right attributes at the right place and time, allows farmers to obtain higher prices for their products. Production planning must align with the marketing plan to enhance farm revenue.

Enterprise Budgeting

Launching and sustaining a profitable farm business requires a good understanding of how different enterprises within the business drive costs and revenues. Enterprise budgets provide a detailed accounting of revenues and expenses by crop or farm enterprise, by production (or marketing) stage, and by cost type. University-developed enterprise budgets are available for some crops and livestock, and recordkeeping tools, such as Veggie Compass, can help small farmers organize their records. Tracking costs for each crop and each market allows farmers to identify the optimal product mix and most profitable markets. Enterprise budgets also provide a basis for assessing the economic viability of a business plan, making financial projections, and anticipating cashflow needs.

Investment Analysis

Purchases of long-term, noncurrent assets, such as land, buildings, and machinery, are important decisions with long-lasting consequences. Investment analysis is used to evaluate the return-on-investment choices, considering the size and timing of cashflow impacts. Estimating payback period, internal rate of return, and net present value are types of investment analysis. Ultimately, investment analysis can be used by farmers to judge whether a particular investment is financially feasible and to compare and rank alternative investment options.

Keeping Tabs

Monitoring whole-farm financial measures is important for anticipating or diagnosing farm business problems. Financial ratios and other indicators can be used to gauge not only profitability, but also liquidity, solvency, and loan repayment capacity. Some common financial measures include operating profit margin, current ratio, debt-to-asset ratio, and term-debt coverage ratio. The income statement and balance sheet are two key whole-farm financial summaries from which financial ratios can be calculated.

Check The Radar For Risk

Farmers face multiple sources of risk, including production or yield risk, market or price risk, legal or regulatory risk, and input cost or labor risk. Risk management involves identifying risks, assessing probabilities of different outcomes, and making decisions that balance risk against potential returns. Various risk management strategies can reduce the likelihood of negative outcomes. Small farms can reduce risks by choosing more resilient crops with more stable markets, diversification of crops or income sources (including off-farm income), investing in irrigation or freeze protection systems, using greenhouses or other protecting structures, spreading sales over time, signing price contracts, hedging on futures markets (only available for some crops and livestock), and enrolling in government farm programs.

The current national downturn for commodity agriculture, coupled with local threats like citrus greening, create additional challenges for many of Florida’s small farms. At times like these, it is especially important farmers engage in financial management practices to improve their chances of success.